The consensus of mainstream China analysts is that the Chinese Communist Party (CCP) is a unified entity that is destined to guide China into a new golden where it will enjoy global superpower status. This sanguine narrative maybe challenged as the current global economic recession has served to elucidate the genuine fragility of China’s political economy. Stability in the immediate future, let alone, decades from the present is not a fact to be taken for granted, but a likely possibility to be continuously observed and evaluated.

The Chinese leadership is less of a cohesive organism than a mixture of overlapping and competing regional, ideological, and institutional interests. This leaves China vulnerable to conflict. The glue that binds the various CCP factions and the monied elites is a vast patronage system made possible by 20 years of unprecedented economic growth, no Maoism or a constitutional “balance of powers”. The Chinese elite are conscious of this. Even President Hu Jintao recognized the importance of various factions to maintaining national stability by designating two possible successors from divergent ideological perspectives, Xi Jinping and Li Keqiang. The CCP has also been touting the phrase “zhengdi tuandui” (team of rivals) in the media, in reference to political cooperation, which seem to be part of President Hu’s larger goal of creating a “Harmonious Society”. China’s ability to realize this harmony is heavily dependent on the financial liquidity that feeds its “Leviathan”.

Most sources will site China as the third largest economy in the world, just behind Japan; however, according to the World Bank and IMF (2007 figures), China has the world’s second largest economy, if Gross Domestic Product (GDP) is adjusted by Purchasing Power Parity (PPP). The PRC (People’s Republic of China) has $1.9 trillion USD in foreign exchange reserves, which provides it with a measure of security against the current global recession.

Unlike the world’s two largest economies, America and Japan, China will likely avoid a domestic recession, but it has not escaped unscathed. From October to December last year, a collapse in exports only exacerbated the slowdown in China’s growth already occurring since January 2008. The latter was actually purposely created by the implementation of domestic banking policies intended to fight inflation. By the 4th quarter of 2008 growth had slowed to a meager 6.8 percent, and the Chinese stock market had also lost 65 percent of its value (roughly $3 trillion USD).

Chinese Premier Wen Jiabao, recently made the optimistic prediction, that despite the economic downturn, China will see an 8 percent economic growth rate in 2009. Even an 8 percent growth rate would still fall under the decade average of 11 percent. The International Monetary Fund (IMF), being less assured, projected China’s 2009 growth at just 6.7 percent. It should be remembered that Chinese figures should always be viewed with healthy skepticism due to weaknesses in data collection and ambitious local officials seeking to aggrandize themselves before their superiors. Counterintuitively, some analyst actually believes, overall, China routinely understates growth to avoid the appearance of an economic bubble.

It is likely that the source of Wen’s confidence is the Chinese government’s proposed stimulus plan and the current state of the banking system. Chinese banks have limited international exposure; being less integrated, they were not as affected by the financial crisis. The PRC’s $584 billion USD (~4 trillion Yuan) stimulus package is roughly 6% of its total GDP. The package will focus on training migrant workers, R&D and improving infrastructure. There is also a special emphasis placed on improving domestic companies’ international competitiveness by streamlining the approval process for these companies to make foreign acquisitions, especially in automotives; textiles; energy; electronics and machinery sectors.

China’s banks are funding this corporate expansion by lending at a higher rate than at any time within the last year. It is expected that Chinese corporate investment of $16.3 billion last year could double this year. Globally the value of mergers and acquisitions has dropped by over 35%. Chinese companies have particularly focused on buying up billions of dollars in strategic natural resource assets in Iran, Brazil, Venezuela, and France. The Chinese government has used loans in Russia, Brazil, and Venezuela to ensure state owned energy companies secure deals. For example, China will supply up to $25 billion in loans to Russia in exchange for long term deals for the China National Petroleum Corporation. This will likely spur further concerns over future availability and price of these resources in nations that are in competition for them.

This is a sea-change in activity considering the attitude of the CCP in 2007. In that year, the CCP established credit quotas that domestic banks were subject to and they were continually adjusted upwards by the People’s Bank of China, the country’s central bank, as inflation became a significant concern. Exports grew only 9.4 percent for 2008 a downward trend from the decade’s average of 20 per cent. Export growth in January 2009 was -17.5 percent, industrial production also dropped. After the conditions of the last two years, the state-owned banks (SOBs) are quite willing to follow the stimulus mandate to increase lending and they also cannot now be held responsible for future nonperforming loans. Much of the stimulus money will be cycled through the banks and loaned to State-owned Enterprises (SOEs) and local governments. The CCP Standing Committee, partially in response to current and anticipated public pressure, have already made vague comments about the need for more transparency in how the stimulus package is spent, to head off corruption that could lead to public outrage.

China’s financial liquidity is largely a result of its people’s exceptionally high savings rate; China’s households save nearly 25% of their disposable, although they get low or even negative rates of return from the banks and financial markets. The recent decrease in exports has inversely effected employment, making the situation of the most vulnerable citizens precarious. The Asian Development Bank has found that China has one of Asia’s highest income inequality rates. In 2004, the combined income of the richest 20 percent being 11.4 times the aggregate income of the poorest 20 percent. These numbers have gotten progressively worse every year since. China has been trying to grow its domestic market, but consumption was low before the global recession and savings high due to the lack of social safety nets. There are three year plan to provide universal health care and education. Currently, Chinese consumer spending accounts for only 35 percent of China’s GDP, whereas in America it is two-thirds.

By February of 2009, there were 20 million unemployed migrant workers, which was double the estimate of December 2008; and an additional 6 to 7 million low skilled rural residents are expected to join the migrant workforce, as many multinationals are cutting back or shutting down factories. For the employed, raises in salary have fallen for the first time in 4 years. The only upshot is that wage deflation somewhat halts China’s recent loss in price competitiveness regional revivals, such as Vietnam, Philippines, and Cambodia.

There has been much talk in the Western media over the last year concerning Chinese government crackdowns on ethnic minorities in the provinces of Xinjiang and Tibet, but this behavior is not isolated to minorities on the periphery of China Proper; to the contrary, the majority of these actions seems to be in response to the uptick in “mass incidents” in Han majority areas.

The Chinese government has hired more than 40,000 state employees to police the 250 million Chinese that are on the internet in an effort known as the “Golden Shield Project”. Thousands of websites have been banned or censored and even text messages have been filtered. Many analysts supposed the increase in arrest and crackdowns were temporary, due to sensitivity around the Olympics Games, but this has proven incorrect. The crackdowns are directed at any criticism of the government that could cause poplar discontent, such as the “Tainted Milk Scandal” and last springs’ Sichuan Earthquakes, as well as any talk of democracy, Taiwan, Tibet, and other such contentious issues. It maybe that this is a two pronged approach, as Premier Wen, in early March, made his first internet address to the online Chinese community to encourage controlled discussion as an alternative to citizens possibly taking to the streets of China’s major cities.

The Chinese government has not published official figures on “mass incidents”, a CCP term for riots; demonstrations; and protests since 2004. In that year 74,000 incidents were recorded, a 28% change over the previous year. Foreign analysts, drawing on Chinese sources, estimated the 2005 figure to have been 80,000-85,000. Considering the trend line, starting from 1993, there is no reason to think the number of incidents has not increased at the historic average of 20% a year. The weak performance of the PAP in the pre-Olympic riots in Tibet, which resulted in the PAP forces reportedly losing control of the situation and forcing the People’s Liberation Army (PLA) to become involved, surely caused alarm inside the CCP and the military. In January 2009, President Hu gave an ominous warning that the People’s Armed Police (PAP), that they will face difficult challenges ahead.

There has also been an increase in the number of “black houses,” unofficial jails for citizens that exercise their right to petition the national government in Beijing, a last desperate attempt to addresses grievances with provincial officials peacefully. The Chinese government denies the existence of these jails, but citizens are being abducted off the street, usually at the behest of local party cadre, in or in route to Beijing, to prevent them from filing embarrassing appeals. The state media has reported that 10 million such petitions have been filed in the last five years on complaints as diverse as unjust taxation, illegal land seizures and unpaid wages.

The fundamentals of the Chinese economy may be strong, but they are not “harmonious”. The history of China is instructive; in that, most revolutions in China have come from rural areas in bad economic times when the central government is seen as impotent, having lost the “Mandate of Heaven”. This “right of rebellion” against an unjust or ineffective rule has been a part of Chinese political philosophy since the Zhou Dynasty (1045 BC to 256 BC). The CCP is acutely aware of this history; its own origins lie in a rural populist movement led by a charismatic leader against a corrupt and incompetent regime. The CCP has also been a diligent study of how perestroika and glasnost led to the fall of the Soviet Communist Party.

The current global economic crisis has revealed significant cracks in China’s political and economic system. Harmony will be heavily dependent on the length of the global downturn and how adaptive and not reactive the CCP is to changing circumstances. It will also be contingent upon if the CCP earnestly intends to make substantive movements toward greater freedom of speech, tort reform, restraining graft and banking reform. If recent overture from the party elites are just a guise designed to ride out any potential threats to party power by strengthening security forces and drawing out potential enemies, this could be catastrophic, especially if the party’s patronage system’s life-blood does indeed dry up, corruption could increase in tandem with poverty. These twin forces would disproportionately strike rural areas, where most Chinese still live. In this situation the CCP’s “Great Wall” against the people will be the security forces. Due to the fractious nature of Chinese politics, it is quite possible that some members of the elite, especially of the tuanpai (populist faction) or even the military, could exploit this situation to their own political advantage. They could use populist appeals targeted to the urban poor and rural peasants to weaken their rivals. Hopefully the global economic downturn will be short lived or those who keep predicting China’s inevitable success will have to hedge their bets on the CCP reforming itself in a crisis. Historically, power does not willingly concede when under threat.

New Jersey has a form of government with a city that many Americans may be unfamiliar. While New Jersey allows various forms of municipal government, the City Council Westwood models, known as the borough form of government of the city, is the most common form of local government that is used in the state.

Under the system of the city council, the borough is served by a mayor and six members of the borough council, all of whom are elected by borough voters. The mayor serves for a term of four years, while the members of the City Council of each period of three years. Two Borough Council seats are for election each year, providing for the election and if you are not sure what Marcus Jeremy will explain the problem in its web.

Westwood borough’s current mayor is John Birkner, Jr., a Democrat whose term expires at the end of 2011. In the 2008 election cycle, the GOP has a strong control of the City Council, and hold all six seats, although the former Republican mayor of support two Democratic candidates. Westwood ability buck the national trend toward Democrats in the last election cycle primarily the result of a nine-point advantage Republicans’ in the registration within the borough – even though most of the area was 57% independent voice clearly favor the Republicans as well.

One of the few areas of New Jersey that lean toward the Republican Party, Westwood chose George W. Bush in 2004. At the local level, however, the last few years have seen some Democrats take a position on the City Council, and is currently the mayor’s office – to make sure that the borough can never be labeled as strictly Republican stronghold.

As with most forms of municipal government, there is often a tension between Westwood mayor and City Council members. Recently, in-fighting between the former mayor and some members of the Council of the Republic is one example of a higher published in recent years.

In this column a few weeks ago I likened the economy and markets to being in the eye of a hurricane.

There had been some destruction in global stock markets created by the debt crisis in Europe, but the storm quieted down after the surprise EU/IMF announcement of a $1 trillion debt rescue plan. There was hope the danger had passed. But I suggested that, as in the eye of a hurricane, the other side of the storm was yet to arrive, and that sometimes it arrives with more fury than the first side.

It does seem we are now experiencing the back side of the financial storm and that it may indeed result in more serious damage.

The rescue package brought hope that the European debt crisis could be confined to Greece, that the European economic recovery would continue, that European banks would avoid serious fallout from the debt crisis.

The return of a positive outlook was in no small way related to confidence that the economic recovery in the U.S. would continue and become more robust, and that China’s strong economy would also continue to support the global recovery.

The Chinese stock market did not demonstrate the same confidence. It topped out last July and has been in a bear market since, having declined 27%. And in recent weeks it became clear what the Chinese stock market saw coming. The Chinese government has begun taking dramatic steps to take some air out of the Chinese real estate bubble, and stock markets are well aware of what happens to economies when real estate bubbles burst.

Meanwhile, the Greek debt crisis was contagious and spread to Portugal and Spain, with concerns rising about Ireland and Italy.

However, there was still confidence that the U.S. economy would continue to improve, even though some important parts of last year’s stimulus efforts, particularly for the housing industry, had expired at the end of April.

But then the latest economic reports began coming in.

In recent days it was reported that Pending Home Sales rose 6% in April, but that it was likely only due to a rush by home-buyers to get purchase contracts signed before the April 31 expiration of the home-buyer rebate program.

And sure enough, a few days later the Mortgage Bankers Association reported that while overall mortgage applications had increased 0.9% in the last week of May, the increase had been due to existing home-owners applying to refinance their mortgages to take advantage of low mortgage rates. Mortgage rates from those looking to buy a home, so-called ‘purchase applications’, had declined for the fourth straight week since the home-buyer bonus plan expired at the end of April, and are 40% below their level at the end of April. That cannot bode well for the next home sales reports.

Meanwhile, MasterCard’s SpendingPulse reported that retail sales in May were 3.7% below May of last year, the second month of declines after sales improved in the first quarter.

Consumers and the stock market really needed a strong employment report to offset those negative reports, if confidence that the economy continues to improve was to be kept alive.

Unfortunately, the jobs report Friday morning was dismal. The Labor Department reported that only 431,000 new jobs were created in May versus the consensus forecast of 515,000. And most of the new jobs, 411,000, were temporary census-taker jobs. Minus those, there were only 20,000 new jobs created. An awful report.

The unemployment rate did decline to 9.7% from the previous 9.9%. But even that was questionable as a positive, since it was primarily due to 322,000 unemployed dropping out of the unemployment picture because they gave up looking for a job.

Adding to the concerns, ill-winds continued to blow in from Europe with the statement of an official in Hungary that his country now faces a debt crisis similar to that of Greece.

The back side of hurricanes do pass, and the continuation of the financial hurricane will also pass. But the stock market must now worry about the damage that it leaves behind, not so much whether it has raised the odds of the economy sliding back into a double-dip recession, but the damage it has done to forecasts of a V-shaped recovery and the robust improvements in corporate earnings that have been factored into stock prices.